India's Prime Minister Manmohan Singh doubled the estimate of investment needed in roads, ports and other infrastructure, underpinning the importance of public works in speeding up economic expansion and cutting poverty.
India requires investments of $320 billion in infrastructure by 2012, Singh said in New Delhi today, revising his earlier estimate of $150 billion on the premise that an economy growing at 8 percent needs matching investments in infrastructure.
Better infrastructure in neighboring China, which began opening its economy in 1978, 13 years before India did, has helped it attract $60 billion of foreign direct investment in 2005, compared with India's $50 billion since 1991. Singh wants more investments in factories to generate employment, accelerate growth and improve the lives of a third of its 1.1 billion people, who the World Bank estimates, live on less than $1 a day.
"If we have to make a decisive impact on poverty, we must further accelerate the pace of growth to 10 percent,'' Singh said at a conference on infrastructure. "Our growth potential will be realized only if we can ensure that our infrastructure does not become a severe handicap.''
Singh's government is improving the country's roads, airports, railways and other infrastructure to attract investments and spur economic growth, which has averaged 8.1 percent in the past three years, making India the second-fastest growing economy after China among the world's top 20 economies.
- China Spending
India, which spends a seventh of China's $150 billion investment in public works each year, according to Morgan Stanley, has boosted spending by a quarter to 992 billion rupees ($21 billion) since April 1 to modernize its transportation and communication links.
"The onus is on the government to act very swiftly on this front,'' said Sunil Munjal, managing director, Hero Honda Motors Ltd., India's biggest motorcycle maker. "One of the critical factors constraining growth is the lack of physical infrastructure.''
The nation loses 2 percentage points from annual growth because of inadequate power and transportation networks, according to Finance Minister Palaniappan Chidambaram.
India produces about 8 percent less electricity than it needs, cutting gross domestic product by a 10th, the Finance Ministry estimates.
- Roads, Ports
Highways, which move almost 80 percent of the goods transported in India, account for only about 2 percent of the country's 3.32 million kilometers (2.1 million miles) of roads. It takes an average 85 hours to unload and reload a ship at India's major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.
Reducing infrastructure bottlenecks may encourage companies such as Intel Corp., the world's largest computer chip-maker, and Ford Motor Co. to invest more in India. Manufacturing makes up 17 percent of India's $775 billion economy, which is half the level in China.
Ford, for example, the second-biggest U.S. automaker, started work on its third factory in China in 2004 with an investment of $1.5 billion. In comparison, the automaker last year planned to invest $75 million in its lone Indian factory to expand capacity, taking its total investment in the South Asian country to $450 million.
Intel does not have a single factory in India, home to the world's largest pool of technical workforce. It has invested more than $1.3 billion since 1985 in neighboring China.
- Capital Formation
"A 10 percent growth rate is possible only if India doubles its gross capital formation in infrastructure,'' said Deepak Parekh, chairman of Housing Development Finance Corp., the country's biggest home-mortgage lender and a member of the government's Investment Commission that helps attract foreign direct investments into the country.
Finance Minister Chidambaram said the gross capital formation in infrastructure, which is the total investment in infrastructure as a proportion of the gross domestic product, has remained equivalent to 4 percent of India's $775 billion economy in the six years ending 2004. It must be doubled in the next five years, Chidambaram said, which he estimates requires an investment of $363 billion over the next five years.
Prime Minister Singh said India would require by 2012, 2.2 trillion rupees to modernize and upgrade highways, 400 billion rupees to refurbish airports and another 500 billion rupees to build 76 new berths in sea ports. Besides, the railways need 3 trillion rupees to develop private container trains, freight corridors and improve facilities in railway stations.
- Public-Private Partnership
"Not all of these resources can come from public resources,'' Prime Minister Singh said. "It is imperative we explore avenues for increasing investment in infrastructure through a combination of public investment, public-private investment and occasionally, exclusive private investments.''
India is bound by law to cut its budget deficit by 0.3 percent of the GDP each year until 2009, constraining its ability to spend on infrastructure after providing almost half the federal budget on defense, subsidies and interest payments.
Singh said the best approach suited for infrastructure is the pubic-private partnership. Attracting private capital can be successful if there is a proper policy framework regarding returns for investors, tariffs and service quality, he said.
"All this requires the establishment of independent regulatory bodies with an appeal mechanism,'' Singh said.